How to exit your business - article from Investors Business Daily quoting Bruce Fenton

News- economics and investments


Plenty Of Planning Makes It Easier To Close Your Shop A big key to heading out the door is THE EXIT

Investor's Business Daily

Plenty Of Planning Makes It Easier To Close Your Shop THE EXIT A big key to heading out the door is making the firm's numbers work.

Tom Christo had been in business with his family for 23 years when the Christo clan sold its restaurant.

Two generations of Christos had run the Worcester, Mass., eatery bearing the family name. But the next generation of Christos lacked the experience and interest in keeping it a family affair, Christo says. So the restaurant - which featured an American-style menu spiced by Balkan specialties like lamb shish kebab - was sold to eager outsiders.

"As a family, we decided our time had come to exit the restaurant business," said Christo, who owned the establishment with his parents, sister and brother-in-law.

The restaurant sold just seven months after going on the block.

Such speed depends on executing a number of steps.

"It doesn't matter what industry an owner's in," said Lindsey Alley, a banker and head of mergers and acquisitions for Houlihan Lokey Howard & Zukin. It's an investment banking firm in Los Angeles.

The Christos happened to use a business broker to guide them through those steps. That saved them from trying to figure out the recipe for selling their business.

Getting Help

"For most owners, selling a business without professional help is a sure-fire formula for creating delays and possible heartache," said Bruce Fenton, president of Atlantic Financial, an asset advisory service in Westboro, Mass.

The steps are what make the difference.

"The most important thing is to get the house in order," said Christopher George, the broker who advised the Christos. "That means cleaning up your business records." For many owners, it requires reversing long-time habits.

"Many small-business owners try to minimize their tax obligations," George said. "Their bookkeeping is, shall we say, creative. Getting your house in order means making sure all of your income hits the books." After all, to get the top price you must show the full potential of your firm's revenue and earnings.

The second step is to plan ahead.

"Start cleaning up your financial records and everything else six months to two years before your target sale date," George said.

For one thing, it takes time to break old habits.

Maybe you used to expense personal items through your business. That was a way to cut taxes by boosting costs. And it was a way to cut out-of-pocket spending on perks like a luxury car.

But now those indulgences are a drag on your bottom line.

Besides, a smart buyer will spot them. That might make him wonder how much of your income is padded, too. That could undercut your asking price.

A head start also gives you time to legitimately turbocharge your firm.

"We went into prep mode," Christo said. "The year before we sold it, we actually grew our business more than we ever did. We started some aggressive advertising. It was beneficial beyond our wildest dreams." Business grew to 5,000 meals a week from 4,000. That beefed up revenue by up to 30%. Profit climbed 10%.

Planning ahead helps you avoid headaches.

"You've got to have a buy-sell agreement in place if you have more than one owner," George said. "That spells out how one can buy the business from another. It can spell out how proceeds from a sale to a third party are divided." If the sale is by an older family member to a younger relative, it can spell out everything from the format of a sale - which impacts tax fallout - to who gets to use the corner office for how long.

Targeting a sale price is step three.

A realistic price is similar to what it would cost to buy your typical competitor. That boils down to the profit a buyer can expect. But a pricing stew contains many ingredients. Does your business dominate its peers? How fast are your sales and profit growing? Can a buyer expect those trends to continue? One threat to continued profit growth is the loss of key assets.

"If you've got a really good salesperson, lock him in with a long-term contract," George said. "Show a buyer that when he unlocks the door in the morning the phones will ring and business will come in, even though you're no longer there." You probably have an idea what businesses like yours sell for, Fenton says. "You can also look for data in industry trade publications," he said. "And look at how much big players in your business pay for acquisitions." Learn what pricing formulas are used in your own industry. And identify what makes your business different from competitors.

"A restaurant," Christo said, "might sell for more if it's located on an attractive beach. Or it might sell for less if it's near a smelly factory." In the end, you may get a more useful target price by consulting an appraiser or business broker. "A professional won't get misled by the emotional attachment you have for your business," Fenton said.

You must understand the tax consequences of a sale. That starts with recognizing what's easiest to sell.

Typically, an entrepreneur will prefer to buy your assets than your whole company.

"A buyer also doesn't want to find himself holding the bag for your corporate liabilities like future lawsuits," George said.

Plus, the buyer is looking forward to depreciating assets.

"By buying assets, his basis is what he paid as opposed to what the seller had depreciated it to," said Michael Brockelman, head of estate and tax planning at Bowditch & Dewey, a Massachusetts law firm. "In many cases, he paid more than what the depreciated basis to the seller had become." That means he can depreciate more, thereby cutting his taxes more.

Sidestepping Taxes

Sellers tend to prefer selling their company outright. That's because the sale of stock avoids double taxation. On a sale of assets, first your firm is taxed on any gain. Then you are taxed when you sell the stock.

One solution: indemnifying a buyer, up to a specific limit, for certain lawsuits against your old firm, says Alley.

Another solution: Convert from a 'C' corporation to an 'S' corporation. To get the full tax benefit, you must do so at least 10 years before a sale, George says.

A third option: "Sell your assets. Keep the company going, especially if you're being paid over time by the buyers," George said.

In any event, selling out all at once generally creates a bigger tax bill than sale by installments.

"But periodic payments entail risk factors," Alley said. "And you won't get the clean exit without headaches you may prefer." If you're asked to take on those risks and headaches, you might want to boost your asking price.

Selling a business can be as time-consuming as running one. That's one of the best arguments in favor of hiring professional help.

It's important to hire the right type of professional.

"Sure, you can save a little money by calling your Uncle Frank, the real-estate lawyer," George said. "But you'll avoid a lot of hassles if you don't call Uncle Frank."

2002 Investor's Business Daily

31 October 2002